By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister last night said the latest Wall Street downgrade for the Bahamas reflected the fact the fiscal numbers were “out of whack”, with another rating agency expressing scepticism about the Government’s ability to stabilise the debt/deficit in the short-term.

Despite the latest blow to the Bahamas’ creditworthiness, Michael Halkitis, minister of state for finance, expressed hope that it would not result in increased borrowing and debt service costs for this nation on the international capital markets.

He suggested the markets may have already priced higher interest rates in when Standard & Poor’s (S&P) cut the Bahamas sovereign credit rating in November 2011, even though its fellow Wall Street credit rating agency, Moody’s, yesterday followed suit by slashing its rating from ‘A3’ to ‘Baa1’.

Tribune Business understands that the Government held an emergency Cabinet meeting on the Moody’s sovereign rating downgrade yesterday, given the impact it could potentially have on the Government’s finances and international investor confidence/perceptions of the Bahamas as a stable economy.

Mr Halkitis described the Moody’s move as “not unexpected”, given that the agency had put the Bahamas on a ‘negative outlook’ for the past 18 months following the S&P action.

Noting that ‘Baa1’ meant the Bahamas still had an investment grade rating, Mr Halkitis said: “We may or may not see an increase in borrowing costs, as Standard and Poor’s had already downgraded the Bahamas in November 2011, so we were borrowing at higher costs already. Standard and Poor’s is the dominant agency.”

Moody’s action effectively means that Wall Street has again slashed the creditworthiness of the Bahamas and the Government, signalling that lending to this nation is now a riskier prospect if the fiscal house is not put in order. And, if risk increases, then the price the Bahamas pays for international capital may also rise, too.

“What they’re reflecting is what has happened over the last few years. Our numbers have just got out of whack,” Mr Halkitis told Tribune Business.

“They’re reflecting what has gone on, that the recovery of our main trading partner, the US, remains fragile, so there are downside risks to tourism. They comment on the narrowness of the revenue base, saying change is going to come.”

Explaining its rationale for the move, Moody’s voiced concern that the loss-making Bahamas Electricity Corporation (BEC) could represent increased ‘contingent liabilities’ for the Government in terms of borrowing guarantees and subsidies.

The Wall Street credit rating agency said the Government’s total debt level hit 53 per cent of gross domestic product (GDP) this year, a more than 21 percentage point rise from the 31.7 per cent it stood at pre-recession.

Noting the Bahamas’ narrow tax base, and that one-off income flows from the Bahamas Telecommunications Company (BTC) privatisation and likes of Baha Mar had masked recurrent revenue weakness, Moody’s expressed huge doubt about the Government’s ability to effect a near-term turnaround.

“We see limited prospects for the fiscal consolidation necessary to strengthen the Government’s balance sheet and stabilise debt levels,” Moody’s said.

“The Bahamas has a limited revenue base, and the Government relies disproportionately on volatile trade-related tax revenue and property taxes.”

Reforms to increase revenues, it added, particularly the introduction of a Value-Added Tax (VAT) and modernising the real property tax system, were unlikely to “materialise” until the 2014-2015 fiscal year.

The Wall Street rating agency described revenue reforms as “a key ingredient” to stabilise the Bahamas’ rating outlook, with the other major components a US recovery and the translation of Baha Mar and the Government’s infrastructure spending into economic growth.

“We expect the Government to find it difficult to rationalise spending and achieve the fiscal consolidation necessary to stabilise the debt and place it on a sustainable trajectory in the near-term,” Moody’s said.

“While the pace of increase in government debt ratios is likely to slow in the coming years, a failure to reverse the recent trend of rising debt will place downward pressure on the Bahamas’ rating.”

And it added: :In addition, the crystallisation of contingent liabilities from debt held by public sector corporations, such as the loss-making Bahamas Electricity Corporation, could adversely affect the rating.

“A further deterioration of the public sector balance sheet due to external shocks in the form of weather-driven events like hurricanes will also be credit negative

“The combination of historically high debt levels and large fiscal deficits has left the Government with limited fiscal buffers to effect further stimulus or respond to external shocks.”

Moody’s cited the Bahamas’ weak growth prospects following the recession, and the weak recovery in tourism and construction, together with a “significant and rapid deterioration of the Government’s balance sheet”, as the main reasons for the downgrade.

Noting that government spending had continued to grow after the May 2012 general election, Moody’s - in an implied criticism of both the former and current administrations - said this had failed to produce economic growth and reduce unemployment.

“The state plays an increasingly dominant role in the economy through elevated levels of capital spending on public works projects, social safety net transfers, public sector employment and increased budgetary support to public sector corporations,” Moody’s said.

“This fiscal stimulus programme is yet to yield growth dividends, and unemployment remains close to 15 per cent, depressing domestic demand.

“The Government plans to gradually reduce capital spending starting in 2013, but increased current expenditure outlays on social transfers will be more difficult to retrench while growth prospects remain subdued.”

Moody’s said the Bahamian economy had contracted by an average rate of 0.8 per cent per annum between 2007-2011, with the recovery set to remain fragile.

The Government last night attempted to blame its predecessor for the Moody’s downgrade, saying it was “telling” that the rating agency said the benefits from public infrastructure projects and increased spending had yet to materialise.

“The benefits have been very narrowly distributed as evidenced by the persistently high level of unemployment,” it said in a statement.

It pledged to unveil a strategy to address “the fiscal imbalance” in the Mid-Term Budget Statement, although it gave few details apart from repeating previous commitments to get the public finances back on a sustainable path.